In this Contract Corner, we are highlighting considerations for drafting sublicense provisions in the context of an Intellectual Property License.
- Definition of Sublicense. A sublicense in the context of an IP license is any agreement where the licensee grants a third party rights to any of the licensed IP. This provision is often overly broad, but can be tailored to include standard exceptions (e.g., ordinary course agreements with End Users, distributors, etc.) in order to avoid an overly broad definition and to make sure that the royalty calculations are clear. It is also important to clarify the definition of End User in the sublicensing context, and to note that the sublicensee (or one of its affiliates) could be an End User if it uses the licensed IP for its own internal purposes.
- Approval. Sublicensing generally requires the licensor’s prior written approval, but requiring approval for every sublicense might be impractical (depending on the industry or technology). As a fallback, parties often agree that such approval won’t be unreasonably withheld.Also consider requiring consent for downstream sublicensing (i.e., multi-tier sublicensing), subject to standard exceptions.
Note: The license should expressly prohibit any sublicensing (e.g., in the assignment provision), “except as otherwise expressly set forth in this Agreement.” The license can also be drafted to permit certain types of “customary” sublicensing activities without requiring express prior approval (e.g., a Sublicense that “(a) is customary or common in the applicable industry, within the Field and Territory, with respect to products or services of a substantially similar nature to the applicable Covered Products; (b) does not grant the applicable Sublicensee sublicense rights to all, or a material portion, of the rights granted under Section [LICENSE GRANT]; and (c) is primarily for one or more of the following purposes: research, development, testing, or manufacturing.”).
- Compensation. All royalty (or other compensation) calculations should clearly cover commercialization by sublicensees, and the compensation received in connection with sublicensee commercialization should be at least equivalent to the compensation that would have been received if licensee had commercialized directly. Also, consider whether or not it makes sense for licensor to recieve a percentage of non-royalty sublicense income. Exceptions to this often include documented, arm’s-length payments received by licensee as direct compensation or reimbursement for R&D.
Note: Sample compensation language is as follows: (e.g., “Each Sublicense shall include a royalty rate on Net Sales in an amount at least equal to the rate set forth in Section [ROYALTIES], and the economic return that Licensor receives from any Commercialization of Covered Products to or for the benefit of End Users by or on behalf of any Sublicensee shall be at least equal to the economic return that Licensor would have received if Licensee had directly engaged in such Commercialization.”).
- No Inconsistent Terms.All sublicenses should be subject to the terms of the license agreement. A provision should be added that states any sublicense in violation of the stated requirements and restrictions shall be null and void.
- Termination. Since use outside of the scope of the license grant is not necessarily a breach of the agreement giving rise to termination for breach [MACOM Technology Solutions Holdings, Inc. v. Infineon Technologies Americas Corp., No. 17-1448 (Fed. Cir. 2018)], licensor should have the right to terminate the license if “any use or practice of any Licensed Technology by Licensee or any Sublicensee is outside of the Field or is otherwise in breach of Section [LICENSE GRANT].”
- Flow Down. Any sublicense shall automatically and immediately terminate upon termination of the license (subject to any expressly permitted selloff period). Consider adding that in connection with termination, “Licensee shall, upon Licensor’s request, reasonably cooperate to facilitate negotiation of a potential agreement between Licensor and any Sublicensee.” Make sure that all restrictions, and other important terms, flow down to each sublicensee. Consider including a non-exhaustive list of particularly important provisions (e.g., licensor’s reserved rights; licensor’s audit rights; diligence and reporting obligations; and restrictions on use of licensor’s name/marks).
Note: These issues are particularly important for University licensors.
If the licensor is to own any modifications/improvements to the licensed IP or any collected/generated data, the licensee should be required to obtain assignment of such rights from any relevant sublicensee. The licensee shall be responsible for any sublicensee’s activities.
Note: Consider adding, “For the avoidance of doubt, End Users shall not have the right to modify or further distribute or sublicense any Covered Products (or any Licensed Technology embedded or incorporated therein), and Licensee shall ensure that each End User is placed on written notice of all applicable restrictions.”
Note: End User-related issues and restrictions could vary depending on the type of technology/market.
- Document Control. Licensee shall provide a copy of each sublicense. However, “Licensor’s knowledge of any Sublicense (including receipt of a summary or copy thereof) or communications regarding any Sublicense shall not constitute any approval by Licensor of the terms of such Sublicense or any waiver by Licensor of any terms of this Agreement or any rights or remedies available to Licensor under this Agreement, at law, in equity, or otherwise.”
Note: Consider adding, “In the event of any conflict or inconsistency between the terms of any Sublicense and the terms of this Agreement, the terms of this Agreement shall prevail.”
Note: Sublicenses that are inconsistent, and licensor review (and implied approval), is a common problem in practice.
- Licensor-Imposed Sublicensing. “If Licensee is unwilling, or is not reasonably able, to diligently develop or serve a potential market within the Field or a territory within the Territory for which there is a potential sublicensee, Licensee will, upon Licensor’s request, use diligent and good faith efforts to negotiate a Sublicense with any such potential sublicensee.”
Note: If the license is exclusive, don’t miss out on untapped markets.
Please be on the lookout for future posts in Sourcing @ Morgan Lewis that update the legal landscape for licensing issues and provide additional drafting pointers.